When, as an employee, you borrow money from your employer, this is obviously not taxable pay. After all, borrowing means that you have to repay the money to your employer. Taxable pay does arise, however, if the loan is written off (in which case you do not have to repay the amount borrowed) or if there is an interest benefit.
Interest rate advantage
An interest benefit constitutes remuneration in kind and is therefore subject to payroll tax. Until 2011, the Tax and Customs Administration set a standard interest rate each year. If the employee paid interest on the staff loan that was equal to (or higher than) this standard interest rate, there was no taxable interest benefit.
From 2011 onwards, the employer must determine the rate of interest the employee would be liable to pay on the open market. The difference between this commercial interest rate and the interest paid by the employee is treated as remuneration in kind and subject to payroll tax.
The employer may designate the interest benefit under the work-related expenses scheme (WKR) as a component subject to final levy. To the extent that the benefit falls within the discretionary allowance, it is then not taxed. To the extent that the discretionary allowance is exceeded, the employer pays payroll tax (80% of the benefit). The interest benefit relating to a loan for the employee’s own home cannot be designated as a component subject to final levy.
Mortgage
Up to and including 2015, the interest benefit on the staff loan – which qualified as a home loan for income tax purposes – was not subject to payroll tax. As the interest benefit was deductible for income tax purposes, there was no point in first subjecting the benefit to payroll tax. After all, the benefit in kind was ultimately offset against the tax-deductible item in the income tax return.
As interest on a home loan is no longer fully tax-deductible in all cases for income tax purposes, this is no longer the case. Furthermore, the interest benefit on an employee loan for a home is now considered remuneration in kind and is subject to payroll tax.
There are plans to reintroduce the standard interest rate. This is due to take effect on 1 January 2020.
Determining the date on which interest is calculated
At Gelderland District Court This case concerns an employee who took out an interest-only mortgage with his employer in 1991. The loan qualifies as a home loan. With effect from 2016, an assessment must be made as to whether the interest paid by the employee is at least equal to the commercial interest rate. The employee believes that the comparison should be made with the commercial interest rate in 2016 and 2017. This works in the employee’s favour, as the interest rate on owner-occupied home loans was not particularly high in those years.
However, the court ruled in favour of the Tax and Customs Administration’s position. The rate of business interest must be determined at the time the loan was taken out. In 1991, the interest rate was considerably higher than the 3.4% paid by the employee. Consequently, in 2016 and 2017, there was indeed an interest benefit to be taxed as remuneration in kind.